Kencana Petroleum Bhd (Nov 23, RM2.60)
Maintain buy at RM2.64 with fair value of RM3.54: We maintain our “buy” call on Kencana with an unchanged fair value of RM3.54, pegged to a CY12 price-earnings ratio of 22 times to the merged Kencana-SapuraCrest Petroleum Bhd earnings.
Kencana has entered into several sale and purchase agreements to acquire 66 acres of leasehold land from Integrax Bhd’s 50%-owned Lumut Maritime Terminal Sdn Bhd for RM28 million cash. The land, which has lease periods of 89 and 99 years expiring on March 13, 2096 and July 9, 2105, is adjacent to Kencana’s existing fabrication yard.
The purchase of the land will expand Kencana’s fabrication yard space in Lumut by 38% to 240 acres. This development is not a surprise as we had reported last month about this potential acquisition. Recall that The Edge Financial Daily had reported that Kencana was in talks with unidentified parties to acquire 130 acres of land beside its main fabrication yard in Lumut, Perak.
We note that even with the new acquisition, Kencana’s yard space is still half of Malaysia Marine and Heavy Engineering Holdings Bhd’s (including the proposed acquisition of Sime Darby’s 130-acre Pasir Gudang yard).
The acquisition is a positive as the cost of RM9.71 per sq ft is half of what we had earlier expected. This will have scant impact on the group’s net gearing, which could reach one times after its proposed merger with SapCrest.
The purpose of the land expansion is to create depth in the group’s fabrication capability and enable a streamlined process which will lead to efficiencies of scale. The group’s existing yard is only 50% to 60% utilised based on the group’s current order book. This means that Kencana is confident of securing significant fresh orders by early next year.
We still view the group’s order book prospects as bright, given Petroliam Nasional Bhd’s spending programme of RM300 billion over the next five years, which includes enhanced oil recovery and marginal field jobs. Upstream has reported that Petronas is negotiating with Kencana and SapCrest to fabricate and install two wellhead platforms for the Bunga Dahlia and Teratai fields, connected to nine fields in Blocks PM301 and PM302 and in the Bergading contract area.
The stock currently trades at an attractive CY12F price-earnings ratio of 17 times, below its 2007 peak of 22 times. — AmResearch, Nov 23
This article appeared in The Edge Financial Daily, November 24, 2011.
Maintain buy at RM2.64 with fair value of RM3.54: We maintain our “buy” call on Kencana with an unchanged fair value of RM3.54, pegged to a CY12 price-earnings ratio of 22 times to the merged Kencana-SapuraCrest Petroleum Bhd earnings.
Kencana has entered into several sale and purchase agreements to acquire 66 acres of leasehold land from Integrax Bhd’s 50%-owned Lumut Maritime Terminal Sdn Bhd for RM28 million cash. The land, which has lease periods of 89 and 99 years expiring on March 13, 2096 and July 9, 2105, is adjacent to Kencana’s existing fabrication yard.
The purchase of the land will expand Kencana’s fabrication yard space in Lumut by 38% to 240 acres. This development is not a surprise as we had reported last month about this potential acquisition. Recall that The Edge Financial Daily had reported that Kencana was in talks with unidentified parties to acquire 130 acres of land beside its main fabrication yard in Lumut, Perak.
We note that even with the new acquisition, Kencana’s yard space is still half of Malaysia Marine and Heavy Engineering Holdings Bhd’s (including the proposed acquisition of Sime Darby’s 130-acre Pasir Gudang yard).
The acquisition is a positive as the cost of RM9.71 per sq ft is half of what we had earlier expected. This will have scant impact on the group’s net gearing, which could reach one times after its proposed merger with SapCrest.
The purpose of the land expansion is to create depth in the group’s fabrication capability and enable a streamlined process which will lead to efficiencies of scale. The group’s existing yard is only 50% to 60% utilised based on the group’s current order book. This means that Kencana is confident of securing significant fresh orders by early next year.
We still view the group’s order book prospects as bright, given Petroliam Nasional Bhd’s spending programme of RM300 billion over the next five years, which includes enhanced oil recovery and marginal field jobs. Upstream has reported that Petronas is negotiating with Kencana and SapCrest to fabricate and install two wellhead platforms for the Bunga Dahlia and Teratai fields, connected to nine fields in Blocks PM301 and PM302 and in the Bergading contract area.
The stock currently trades at an attractive CY12F price-earnings ratio of 17 times, below its 2007 peak of 22 times. — AmResearch, Nov 23
This article appeared in The Edge Financial Daily, November 24, 2011.
